Dollar Illiquidity Getting Critical: A $10 Trillion Short Which The Fed Does Not Understand

Tyler Durden's picture

In the latest report from ADM ISI’s strategy team, “Dollar Liquidity Threat is Getting Critical and Fed is M.I.A.”, Paul Mylchreest argues that mainstream economic luminaries (like Carmen Reinhart) are finally acknowledging the evolving crisis due to the dollar shortage outside the US, a topic which even the head researcher at the BIS shone a spotlight on yesterday suggesting that the strength of the dollar, not the VIX is the new "fear indicator". 

The bitter irony is that the institution which appears to have very little understanding of what’s actually happening is the Federal Reserve. We noted Stanley Fischer’s speech yesterday when he argued that liquidity is “adequate”.... at least he didn’t say “contained.”

Yet Dollar illiquidity has been one thing that central banks can’t control…think SNB and Swiss Franc, BoJ and Yen (full report on this below) and now the PBoC as the RMB looks at 6.90. Mylchreest points out that Fischer could take a look at dollar cross currency basis swaps (chart below) and the dollar liquidity problem would be immediately obvious. 

Fischer could take a look at dollar cross currency basis swaps (chart below) and the dollar liquidity problem would be immediately obvious.

While everybody is now waiting for the Fed to wake up, here at ZH we have been tracking the issue of a global dollar shortage well ahead of the mainstream, starting back in 2009 and continuing with “The Global Dollar Funding Shortage Is Back With A Vengeance And ‘This Time It's Different" in March 2015 and “Global Dollar Shortage Intensifies To Worst Level Since 2012” in October 2015.

If the dollar continues to strengthen, it will spell trouble for the recently adopted market narrative that Trump brings higher inflation and higher rates. Another major rotation and market reversals are the last thing that active managers need, or can can afford, in the run up to year end.

From the first section of the report:

We know the narrative...Trump equals higher inflation, a tailwind for commodities and a headwind for bonds. We are “Endgame Inflationistas”, but declining US dollar liquidity threatens this narrative near-term.


Dollar illiquidity is something that even central banks struggle to control, e.g. Swiss Franc peg, BoJ losing control of the Yen and now the PBoC/RMB.


The price of the dollar acts like a “Global Fed Funds Rate”. A rising dollar tightens economic conditions globally, adding considerable deflationary pressure as is clear from the chart below.



Most commentators are not making the link between a rising dollar and a shortage of offshore dollars (Eurodollars). China’s financial system is vulnerable and it’s being reflected in RMB weakness.


The lack of a dollar swap between the Fed/PBoC is a glaring omission. We expect BRICS nations to become increasingly irritated about the current dollar-based system.


In his recent speech, “Is There a Liquidity Problem Post-Crisis?”, Fed Vice Chairman, Stanley Fischer, concluded that liquidity is adequate. Sadly, that is incorrect and a glance at the chart (below) of negative Cross Currency Basis Swaps for dollar funding illustrates the error all too easily. A US$10 trillion Eurodollar short is a more dangerous and risky beast if the Fed doesn’t understand it!


The table below shows the Cross Currency Basis Swap (CCBS) for US dollars using the average for Euros, Yen, British Pounds, Swiss Francs and Canadian Dollars. We discuss the CCBS in more detail below but, in essence, it is the additional cost of borrowing dollars via FX swaps in these currencies compared with what it should be according to interest rate differentials. The more negative the CCBS the more it implies a structural dollar shortage and a liquidity problem in dollar funding markets.



While the problem has been building for more than 2 years, mainstream economic luminaries are (belatedly) starting to take notice. This was Harvard’s Carmen Reinhart last month.


“Today, seven decades later, despite the broad global trend toward more flexibility in exchange-rate policy and freer movement of capital across national borders, a ‘dollar shortage’ has reemerged.”

* * *

Much more in the full report below.

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Cursive's picture

A problem, no doubt.  But the timing...that is the $64k question.

jcaz's picture

Mrs Doubtfire and crew not realize they've been gamed?  Shocker.....

Lynx Dogood's picture

Timing is intentional as is the physical shortage in non US markets. It's called Sabotage for reason! We had teasers, this will get crazy for a time, the goal is to undermine trust.

ussa's picture

Hence the US has the ability to print $500 Ben per year to fund internal improvements and crate enough currency to allow global productivity and growth to advance. Seigniorage might be helpful some time.

Trader Scott's picture

Good job ZH. And every time I talk about about my bullishness on the US$, I get called an idiot.

cougar_w's picture

There have been predictions for 4 years that a shortage of dollars would be the trigger than implodes the developing world economies. If we have now arrived at that cross-roads, then the problems in India (currency move amid desperation) and China (RMB debasement and real estate bubbles) are going to accelerate.

That's 2 billion people suddenly between a rock and a hard place.

CapnJackDaniel's picture

Help me out, too many headshots. What does this mean in real on-main-street terms?

Mr T's picture

I think it means there is so much debt being created and rolled over there isn't a big enough server to hold all the digits especially the shot hole now known as Europe now since they do not create any more physical notes for that would be inflation. Please correct me if I am wrong

zhandax's picture

"Scribd is down for maintenance."

So I can't read it yet. Can someone explain why, in the face of a dollar shortage, China appears to be dumping dollars (treasuries)? The knee jerk response would be to cheapen the renminbi, but if the market is doing that for them. why squander scarce resources to help it along?

Wild Theories's picture

China and Saudi Arabia are selling US IOUs for US cash

JackT's picture

Fractional Reserve Lending - the debt chain keeping the beast down is breaking

Yukon Cornholius's picture

Can't we just print more money? Why doesn't that work? If you need more, make more. Duh.

jfb's picture

It goes against the goal of a digital currency where Big Brother decides what you (or he) do with your money

Wild Theories's picture

doesn't have much to do with whether the tap is on or not, it's not going where it's needed: in the external(outside the US) market.

Ms No's picture

Did somebody just call "pull it" or what?  Trump is on deck and now shit is melting down in four different directions?  Sounds froggy.

monad's picture

You weren't there. Don't believe anything. Fauxalists lie about everything. Just to be consistent and trick anybody who's awake. Including each other.

Popcorn! Now!

Cutter's picture

Interesting, Raoul Pal, the former Goldman luminary, literally just tweeted that he thought this may be the preeminent story for 2017.

Omega_Man's picture

why would the rest world scurry for worthless shit dollars...

just default on USD loans...use your own currency.... end of story 

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Omega_Man Nov 16, 2016 11:41 PM

What would you want to hold in India if you lived there? Worthless rupees or USD? What if you lived in South Africa? Rand or USD? Same for China, would you want to hold Renminbi or USD? The best question of all, okay, it's a tie: if you lived in Venezuala or Zimbabwe what would you rather have, the local currency or USD?

See, that was easy!

MK13's picture

I'd want to own precious metals in variable amounts of silver, gold, platinium, palladium. You know fiat is over when China doesn't care how much debt it's printing in order to build New Silk Road and secure its hard assets. Sale of US treasuries is now utilized because Trannies are going down in price (higher yield is coming here), china is trying to let the air out of its currency in controlled fashion.

MK13's picture

I'd want to own precious metals in variable amounts of silver, gold, platinium, palladium. You know fiat is over when China doesn't care how much debt it's printing in order to build New Silk Road and secure its hard assets. Sale of US treasuries is now utilized because Trannies are going down in price (higher yield is coming here), china is trying to let the air out of its currency in controlled fashion.

Oh regional Indian's picture

With a temporarily strong dollar, there is the minor inconvenience of US Mil Predator drones to consider though....

India is really fucked at the moment with the demonitization move....the long term repercussions are staggering...

Something tells me the trigger has been pulled...

RaceToTheBottom's picture

I think India was the beta try for cash removal...  in the world.  They are not happy...

fellatio is not fattening's picture

Can you tell me how best to profit from this without using futures?  A US Dollar ETF long, or a short of another currency?  I used to know this stuff backward and forward, but health hasn't been good and I'm losing track easier,  thanks

USofAzzDownWeGo's picture

UUP is the usd etf. Buy options on it, they are cheap. 

tarabel's picture



Let's see...

Dollar shortage abroad...

Record sales of USTs by foreign entities...

I don't think those foreigners are taking candy or baseball cards in trade for their stash. 

So I suppose that the shortage is/was real and is being addressed by the Fed hoovering up all those overseas bonds.


the grateful unemployed's picture

what puzzles us is the way all this T bond selling doesnt amont to more us dollars printed in payment, because this selling into the secondary market is not the same as repatrioting those bonds held in custody (apparently)

the us holds bonds sold to foreigners in custody and and china and saudi arabia have been selling, but that doesnt mean they get dollars in exchange it simply means the cusip numbers get transferred to somebody else.  the collateral doesnt really exist only the cash flow from the interest.

the whole idea that these countries can actually dump treasuries is about as foreign as it gets, dump them to whom, for what? you cannot repatriot bonds. all you can do is play musical chairs, and hold something else.


who is buying those bonds? pick a country belgium for instance. in all likelihood those bonds held it trust for foreign governments that were sold recently are really in the vault at mariner eccles, by way of some convoluted process., even if we gave China dollars what could they buy, American manufactured goods? of which there are few and fewer Chinese consumers, should they actually get dollars for those bonds the dollar will rise and impact the value of the bonds they still have.  so a little bit of selling leverages a big loss of value, what are the Chinese and the Saudis getting for those bonds, not much best guess

Jus7tme's picture

The terminology is wrong AGAIN. It is not USD that is having bad liquidity. It is all the counterparty currencies (JPY, CNY, maybe EUR) that are having bad liquidity, meaning holders are not able to sell their currency for USD without causing the value to drop against the USD.

The USD at the moment is super liquid. JPY, CNY,etc, are not.

SoDamnMad's picture

I walked into a European bank recently to dump some Euros and buy USD. I looked at the spreads on currencies (buy vs sell) and I was amazed at the recent widening. Of course I got ass raped but I am glad that I had bought a lot of gold but saddened by boating accident on the lake. 

Wild Theories's picture

nice piece

now I've visualized it

all the intricacies of high finance isn't too different from the flow and cloggings of pipes for plumbing

AlbertthePudding's picture

So take over the Fed if its bust!

kuro_neko's picture

Bitcoin making new highs for this year...

Herdee's picture

They were wrong on a big oil price increase into the last part of 2016. Trump would seem to have been briefed and understands the Chinese currency situation and already labels them as currency manipulators. But just like politicians, I think that Trump's statement is a smokesreen for what action they might need to take in order to get the economy moving. Tax laws changed quickly,repatriation of corporate offshore money and lower corporate tax rates tell me that something very big is coming in currency moves. My feeling is that the Euro will get bashed down to .95 and even lower. They're in trouble over there and to redirect money, the U.S. will stop most of the military spending there and redirect that money for infrastructure projects. I'm looking at massive repatriation of Dollars and that spells inflation.And tariffs? I wouldn't want to be in Europe's or China's shoes. The investment will be in the U.S.once again.

Citizen_x's picture


Very interesting ideas and concepts. 

If China is dumping US Bonds, then the FED and alike are the only buyers

at auction.  The FED makes money by capital extraction. Interest rate spread,

Fees and T-bill auctions.  

So, NO fresh credits, our current business model, leads to...

NO economic engine.  No entitlements.

Trump was hired to say

"Medicare, you're fired:

 Social Security, you're fired:

First amendment, you're fired"

Good old fashioned exports, and renegotiating debt obligations is

the only way to help the US.



RaceToTheBottom's picture

1930 style flop houses will become the norm to forestall the riots and general unrest....  Tent cities will become the least of our concerns.

Stadiums become one large, FEMA controlled flop house?  But what about the millionaire players and all the Tax deductions they got?  They were supposed to bring prospertity....

Clock Crasher's picture

Can't tapper a ponzi scheme

FX223's picture

That says it all...hope you don't mind but I'm going to make a lot of use of this short sentence.

Keep stacking and stashing friends.

peterk's picture

i would agree with previous poster, chart shows temporary  excess of  counter party  currencies in moments

of crisis. people cant get out of those currencies quick enough as their system is not as efficient a market place

and this makes sense as the US has the largest liquidity pool of currency.

The YEN has the 2nd largest liquidity pool so its efficiency as a market place would be similar to that

of the US.

This chart is FALSE, it just shows  efficency for  a particular market currrncy and the US being

the  most widley circulated currency as  aliquidity pool is more EFFICIENT, ,,, its as expected.

This chat doesnt mean the USD us a STRONG currency, it just means its the RESERVE currency due to its

large liquidty ciculation.

I would buy YEN over USD anyday as a general trade. YEN has appreciated since  the 1950's in a linear fashion

against the USD and will continue to do so. General mccarthur gave the YEN 360 to 1 against the USD as an exchange

rate based on the 360 degress of the japanese flag, rising sun. VERY SMART MAN!

Clock Crasher's picture

Re-purpose the Eccles building into a Treasury Department Mint where Americans send in their gold/silver jewelry to be minted into AGE ASE bullion.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Clock Crasher Nov 17, 2016 2:21 AM

Heck after reading about it over on Drudge the most top-secret building hidden in plain sight is located at 33 Thomas Street in NYC.

Talk about a Gotham-city fucking horror show: that building looks like a dungeon or hotel California: you can enter but you can never leave.

Batman11's picture

We tried to form a global economy.

1980s – boom

Early 1990s – bust

Late 1990s – boom

Early 2000s – bust

Mid 2000s - boom

Late 2000s - bust 

2008 on – stagnation

We even put the economy top of the agenda with economic liberalism.

We put in place a technocrat elite in Central Banks to ensure things would run smoothly.

We have lost hope that the Central Bankers will deliver after eight years.

Let’s face it a global economy was a step too far for an elite that have never managed to run a national economy successfully for any length of time.

We may want a global economy but no one has a clue how to run one.

It’s been eight years since 2008 and the global economy hasn’t recovered.

We need to break the problem down into manageable size chunks.

Even national economies have been beyond our capabilities so far but it makes the problem more manageable.

Leave ideas of a global economy on hold until economists understand a national economy.  

Batman11's picture

Problems like the one in the article are going to be totally out of their league, they are clueless.

These people didn't notice the boom getting out of hand or the US real estate boom - A grade arseholes are running the show.

falak pema's picture

One thing is very clear : Obama is the last Potus to promote globalization and Mutti was his not so secret card in the EU as staunch supporter of one of its vectors : the TTIP/NAfta corporatocracy templates that made the US and German OLIGARCHS masters of world trade and which allowed the corporatocracy combine to launch its Asian pivot.

Now not to be.

That is now backfiring as Brexit and Trump have shown. And the rising tide of resistance world wide to these corporate monopoly trusts taking nation states hostage in regulatory capture (witness the ad hoc arbitration clauses that bypass elected national reps' legislation and jurisprudential force), it is now the sign that,  in future, if international agreements on trade are conceived, they will be obliged to incorporate social and environmental chapters; as both these aspects are considered vital by the broad international community, barring a few nut cased madhouses of regressionary revivalism (Trumpistan, Wahhabistan, Talibanistan and Oilmonopolyistan despotic regimes).

What is very clear is that Mutti has been Obama and US globalist Oligarchy's secret card  during the Obama "velvet gloved presidency", used to DISCARD the Schroeder doctrine of rapprochement with Putin's Russia via the North stream and all that it implied, for launching an integrated European zone from the Ural to the Atlantic-- à la Charles de Gaulle and not necessarily including Maggie's UK farm. As that had become over a 40 year period the Reaganista financial Trojan horse since the BW revoke and City  "special relationship" bankster handshake of the hatchery of financial derivative soup concoction under the neoliberal mantra of Hayekian road to Oligarchical serfdom.

Obama has had the courtesy to show his whole hand in his dying moments as a Potus whose role has got unhinged, his image of philosopher emperor tarnished, and whose Euro surrogates now face  the heat and dust of his legacy's upcoming turbulent dismantlement on the global stage.

Grandad Grumps's picture

There was a point where it was necessary to flood the world with dollars so that there were enough in existence for the world to trade. But for the globalists to succeed they must destroy the dollar and move on.

I believe it is the Quran that implies that Satan's power on earth shall reside for 1000 years in Britain, 100 years in America and then 10 years in Israel before he is once again banished for 1000 years of peace. We seem to be in the second transition which has manifested itself in apparent insanity, psychopathy and corruption

falak pema's picture

SO the Prophet and Nostradamus were one and the same person in two embodyments of the divine Messenger who could interpret the Quran about notions that didn't exist ?

Thats nearly as good as Jesus Christ; where we have a three in one. The Holy Spirit of course is a mystical thing without a body but maybe that gives it an edge on the Prophet of Quranic mystery tales.

I think everything will become clear on Judgment Day, whether it occurs by human design or error or the heavens falling on us due to global warming.

You should email that info to VP-to-be Pence, he is a passionate believer in magical mystery of heavenly bent.

As long as you don't tell him the whole story : That the Duck may be Satan's new messenger of the Apocalypse. That could make Pence turncoat to start a crusade for the holy grail of satanic obliteration to ensure the 1000 year peace before Israel Hands gets his hands on the loot! (even for 10 years its insupportable for a tru-Goy boy scout !)

Mamma Mia, the Duck has enuff trouble on his hands at not being labelled a nepotist cum peddler of golden bracelets.

oncemore's picture

I consider all fiat as a risk. Dollar is primary fiat.

dollar will go bust as the last fiat, or at least not the first fiat. Japs EU Uk Swiss franc, etc will go first.

I consider PM as a store of value, hedging against fiat and could not care less, what fed says. to contrary, they have been lying, they lie today and will continue tomorrow as well.

Econogeek's picture

This is a COLLATERAL issue.  The dollar is the global (not just reserve) currency, psychologically like gold.  Trump's "America First" makes it all that much more valuable.  

The Fed can keep trashing the dollar and it'll keep rising because there isn't enough current-price gold for collateral.  Trump can do fiscal stimulus, Treasury can fund, Fed can monetize, and the dollar will keep going up as long as we're doing America First.  

Nixing trade deals will push the dollar up further.  So will Trump's push for energy independence.  And so on.  America First is hugely bullish for the dollar and bearish for the EM currencies.  

At some point people will figure out gold.  Gold and the dollar should both be going up.  The inverse relationship is almost over, I think.

Strong dollar is deflationary.  Falling EM currencies should be inflationary in those EM economies, but I don't think they will be, since the dollar is the world currency -- not just the reserve currency, but the global currency writ large.  It's a borderless capital world, thus the first innings of the war on cash.  

Strong dollar together with rising gold prices are super-deflationary.  It's coming, in my view.  Then comes the shift to the yuan (gold-backed), then comes hyperinflation in dollar terms.  So we're still a long long way from hyperinflation.  My view.


brightdayfin's picture

most reasonable post on ZH in a very long time - thanks EG!